Essential Legal Documents for Incapacity Planning

In Estate Planning, Incapacity, Power of Attorney, Revocable Living Trusts by Tarleton

Incapacity planning

Estate planning is often thought of as the process of planning for the transfer of assets to beneficiaries at death; however, a comprehensive estate plan takes into account your wishes for your care when facing cognitive impairment, ranging from normal age-related decline to complete incapacity.  The reality is that we all face an increasing chance of cognitive impairment as part of the normal aging process, but even young individuals could experience cognitive impairment or incapacity as a result of a medical emergency.  There are several key documents, discussed below, that should be in place for any adult to cover such circumstances.

 

What are the risks of failing to plan for incapacity? 

Without the appropriate documents in place, it would be necessary for your family to get a court to appoint a guardian for you to take control of your assets and health care decisions.  A guardian is supervised by a court and must annually report to the court his or her actions regarding your healthcare and assets, which involves ongoing legal fees and record keeping by your guardian as long as you are incapacitated or until your death.

 

The two primary areas that need to be considered are your finances and healthcare.  If you have minor children, you would also want to consider who would serve as guardian of a minor child in the event you became incapacitated and another parent was not able to care for the child.  If you are a business owner, it is also important to consider how your business might be affected if you became incapacitated, who would be in control of the business, and taking steps to avoid the risk of key decisions being delayed by the involvement of a court.

 

Key Consideration:  Choosing an Agent

When planning for incapacity, the selection of an agent must be made carefully, since your agent could have the authority to act on your behalf while you were unable to supervise him or her.  You may limit an agent’s authority, but a legal document cannot make a proposed agent act trustworthy if that person has not already exhibited that quality.  Therefore, someone should only be appointed as your agent if you feel he or she is trustworthy and suitable for the type of responsibility involved.  Other considerations include the age, health, financial literacy, and availability of the proposed agent.  Since an agent named by you might be unable or unwilling to serve at the time of your incapacity, it is also very important to consider naming at least one alternate agent.

 

Planning for Finances

 
Power of Attorney

A power of attorney for finances (often called a “statutory durable power of attorney”) is a legal document that gives your agent the authority to handle financial matters on your behalf.  In some situations, it may be useful to limit the authority of the agent to specific powers or to a specific time period, however, when planning for incapacity it is usually preferable to appoint an agent with broad authority that does not terminate if you become incapacitated.  This is to make sure all of your assets, particularly critical assets such as digital assets, could be managed by the agent without the need for court involvement.

 

Powers of attorney have two types of effective dates, either “springing” or “durable”.  A durable power of attorney becomes effective immediately upon being signed and continues whether you are incapacitated or not.   A springing power of attorney only becomes effective while you are incapacitated.  There are advantages and disadvantages to each type depending on your wishes and whom you wish to appoint as agent, which we can discuss further with you.

 

Revocable Trust

A revocable trust (sometimes called a “living trust”) is a trust established during your lifetime that appoints a trustee to manage your assets.   It is “revocable” because you may terminate the trust if you wish, as long as you have the mental capability to do so.  Not everyone needs a revocable trust, but it can be an excellent planning tool to provide for the management of your assets in the event of incapacity without the need for court supervision. 

 

The agreement creating the trust involves three parties:  the “grantor” who created the trust, the “trustee” who manages the trust assets and makes distributions, and the “beneficiary” who receives or benefits from distributions from the trust.  Commonly, the same person is acting in all three roles upon the creation of the trust, but an alternative is to appoint a third party as trustee (such as a family member or a bank with trust powers) if immediate management assistance is desired.

 

One of the benefits of a revocable trust is that it provides an easy transition if the grantor/beneficiary becomes incapacitated while serving as the initial trustee, or even to provide for this transition if the beneficiary simply no longer desires to manage the trust assets.  The successor trustee listed in the trust agreement will take over the management of the trust assets for the incapacitated grantor/beneficiary during the period of incapacity. The trust agreement can specify how your assets in the trust are to be used while you are incapacitated, including continuing distributions/gifts to family members for whom you wish to provide.  Other benefits of a revocable trust include the ability to reduce or avoid probate, maintain privacy over assets held in the trust, and serve as a dispositive estate planning document.

 

Planning for Health Care

 
Medical Power of Attorney

The medical power of attorney is a legal document that allows you to name an agent to make health care decisions in the event you are unable to do so (when such inability is certified in writing by a physician).  Without a medical power of attorney in place, health care decisions would be made by next of kin in the order of priority given under Texas law.  Having a medical power of attorney in place, however, is the best way to ensure that the individual(s) that you want to make health care decisions for you are empowered to do so.

 

Directive to Physicians

This legal document (sometimes called a “living will”) communicates your wishes regarding end of life care when you are unable to do so.  It allows you to specify whether or not you want a physician to use artificial life support treatment if you are diagnosed with a terminal or irreversible condition.  This is not the same as a “do not resuscitate” or “DNR”, which is a separate document that expresses your wishes regarding resuscitation.

 

HIPAA Authorization

The agents who are appointed under a medical power of attorney will need to have medical information disclosed to them to effectively make health care decisions on your behalf in the event of your incapacity.   A HIPAA authorization allows your doctor to disclose medical information to the agents selected by you, which can include individuals other than just those named under the medical power of attorney.

 

WHAT NOW?

The documents discussed above are the key legal documents for having an incapacity plan in place, however, it is important to periodically review such documents after they are completed.   If you have questions about incapacity planning or estate planning, please contact us at info@tarletonfirm.com or (214) 935-9004.  Although we are located in Dallas, we serve clients all over Texas.

 

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